Trading Just like the Old Days

The bad news is that we had two failed bounces this week and the market suffered its worst month in a long time. The good news is that the dip-buyers showed up this morning and many leading stocks, like Facebook (FB), Netflix (NFLX), Google (GOOG) and Qihoo 360 (QIHU), are acting well.

Despite panicky action in Europe overnight, the dip-buyers jumped in on the gap-down open and kept pushing until the final hour of trading when they locked in gains. With the potential of more negatives from overseas this weekend, it isn't too surprising to see some selling into the close.

Overall, the indices still look poor even though they did finish off the lows of the day. Some key support levels were broken and, more notably, we actually saw another failed bounce. I can't remember the last time we have seen two bounces fail so quickly and completely.

One big positive is that stocks are not trading in a highly correlated manner and there is good action to be found. This is not a situation where bids are disappearing across the board and stocks are in a free-fall. There is underlying interest and buyers patiently waiting for stocks to pull back further before they buy.

The fact that there is good action doesn't fix the problems that have developed for the indices, but it does provide good trading opportunities. I actually find it quite refreshing to see the market act like it used to in the days before the central bankers were the only thing that really mattered.

I have an article up this weekend with small-cap ideas, and I'll be digging for more potential setups in future columns as well.

Enjoy the football game, and I'll see you Monday.

Jan. 31, 2014 | 10:35 AM EST

Logic Returns to the Market

News matters again.

We have our second failed bounce this week, but despite the huge point loss and the poor breadth, some leading momentum names are holding up well. Google (GOOG) and Chipotle (CMG) are up nicely are their earnings reports but we also have Facebook (FB), Tesla (TSLA), Intercept Pharmaceuticals (ICPT) and Netflix (NFLX), my stock of the week, building on Thursday's momentum.

I really want to stress again that what is happening in this market is a return to normal trading. It doesn't just dip for 10 minutes and go straight back up. You can see human emotions at work and it really does matter which stocks you are buying. It isn't just correlated movement based on what the central bankers are doing.

While it can be painful when you are in the wrong positions and we gap down big, it is refreshing to see the return of logic to the market. News matters. Stocks with good news like FB and GOOG go up while those that offer nothing special are taken down.

We have decent bounce action in the very early going but it is going to be a long day and I'm not in a hurry to proclaim that the worst is over. We need to watch very closely for a retest of the early lows. If we breach those levels, watch for another round of sell stops to trigger. Also keep on mind that margin calls start to come into play and, of course, we have end-of- month window dressing and option pinning to consider as well.

I added some FB this morning and want to add a few other things but I'm waiting until later in the day before I deploy more capital.

Jan. 31, 2014 | 7:40 AM EST

Buckle up for a Rough Ride

The days of the endless upside action are waning.

What is normal for the spider is chaos for the fly. --Charles Addams

In 2013, a day with good gains like yesterday would be a good reason to declare that a correction was over. Pullbacks were consistently shallow and once we started to bounce, the buyers would rush in out of fear of being left behind.

We saw some of that buying panic yesterday morning after the strong news from Facebook (FB), but things slowed in the afternoon and we are gapping down aggressively this morning following poor action overseas.

Market players were hopeful that good news from Google (GOOG) and Amazon.com (AMZN) would keep sentiment positive and the momentum running, but AMZN was a bit weak and poor economic news out of Europe is causing pressure.

In Europe there are a variety of issues causing problems. German retail sales were extremely weak, deflationary fears are rising and there is concern that banks are carrying too many bad loans on their books. The emerging-market issue also continues to cast a pall.

The characteristics that served the market so well last year, namely central bank support, is no longer in play and that means we have to be ready for choppier and more inconsistent action.

My theme recently has been that the character of the market has shifted and that we have to be ready to a return to more normal trading. Normal means that we have corrections, pullbacks and failed bounces, rather than endless upside action with extremely shallow and short-lasting dips.

All you have to do is look at the charts of the indices since the first of the year to see how things have shifted. So far this year, the indices have barely managed to trade in positive territory, we have breached key support levels at the 50-day moving average and we are working on our second failed bounce of the week this morning.

For the permabulls this action has to be quite troubling. They are used to one-way action and, after a bounce like yesterday, they would be fully loaded up for the trip back up to the highs. That was normal for the last couple years, but now we are actually seeing selling and shorting into strength and further pressure.

We haven't had trapped bulls very often in the last year or so, which means we are likely to see greater downside pressure as they look for a way to escape. Downtrends are built on failed bounces and the more failed bounces we have, the more strength will be used as an opportunity to sell.

The good news is that this up-and-down action is going to provide some very different types of trading opportunities. The key is that you have to approach the market differently and use shorter timeframes and different styles.

The key to surviving a market like this is to maintain flexibility and you do that by making sure you have plenty of cash available. When trades don't work, you need to dump them fast and keep digging for something better. Stay defensive and selective and the opportunities will arise.

Buckle up, it's going to be a rough ride.

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